Furloughing EMI option holders

The issue

By way of recap the EMI option scheme is a very tax-efficient way of incentivising employees. Put simply it allows option holders to enjoy capital gains tax treatment (usually including Entrepreneurs’ Relief) for disposals of shares in their employer company. The rules to qualify for these kinds of options are very strict and include the requirement for employees to work a certain number of hours in the business. The requirement here is that the employee works:

  • on average at least 25 hours per week, or

  • where the employee spends on average less than 25 hours per week working for the granting company (or one of its subsidiaries), on average at least 75% of their total working time must be working for the granting company (or one of its subsidiaries).

Technically, therefore, an employee who does not work during a furlough will not meet these requirements and is at risk of his or her share options being disqualified from the tax treatment. If an EMI option holder ceases to meet the working time requirement, this is a disqualifying event. If the option is not exercised within 90 days of the disqualifying event, the tax treatment of the option shares changes and it will effectively be treated as an unapproved option on exercise – and the profit will be subject to income tax.

Forbes Dawson view

Some advisors are suggesting that employers hold-off furloughing EMI option holders. That may be the safe approach from an EMI perspective but it is also a very expensive approach. Personally I would be flabbergasted (first time that word has been used in a tax bite I think!) if HMRC do not introduce some kind of concessionary treatment here. For example they could just say that for EMI purposes the employee is deemed to have met the working time requirement during furlough. If the employer is not prepared to take this sort of ‘punt’ then consideration could be given to option exercise before the furlough. Unfortunately this comes with a heavy cost too because the company would then be denied a healthy tax deduction that can be enjoyed when an exercise takes place shortly before a sale.

If I were making the decision I think I would proceed with the furlough and hope that good sense prevails, particularly if the financial future of the business depends on the cost savings. I understand that HMRC are being heavily petitioned to respond to this issue.




Sign up for our newsletter

Interested in receiving the latest tax planning ideas?

Sign up to Tax Bites – our weekly update offering practical but effective tax saving tips.

Contact Us

You can use this form to request us to give you a call or if you prefer just leave us a message. Please be sure to leave us a contact number or email address for you and we will get back to you as soon as we can.

0161 927 9277


Fairbank House
Ashley Road
WA14 2DP